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Worry About The Economy, Not The Fed
-- October 27, 2003

The Fed meets to discuss interest rates tomorrow. So, that's what everybody's talking about. But even if the Fed were to raise interest rates -- which we don't expect to happen immediately -- the real worry is an economy where growth is still fragile at best ...

Jobs are the main reason why the Fed will need to keep rates low. Consider these telling facts from Royal Bank of Canada Capital Markets research:

  • In the last 25 years, the Fed has never raised rates while the year-over-year rate of growth in US payrolls was below +2.5%.

  • Payrolls would have to rise by 275,000 per month for 12 straight months to boost year-over-year growth to +2.5%.

  • But, currently, the year-over-year rate of payroll growth remains negative.
Clearly, the breadth and sustainability of the US economic recovery is precarious. The current job situation points to future weakness, not strength. Yet, a 1% Fed Funds rate says the Fed is running out of monetary bullets. And a soaring budget deficit says the government is running out fiscal firepower.

related article:
What The Fed Is Considering At Tuesday's Meeting

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